Ties to Enron blinded Andersen

CaptionThe Glickiak

Joe Glickauf demonstrated his primitive computer, dubbed the Glickiak, to anyone who would listen. Glickauf convinced General Electric to buy one of the early Univac computers and supervised its 1952 installation. The advise set Andersen on the road to business consulting.

Joe Glickauf demonstrated his primitive computer, dubbed the Glickiak, to anyone who would listen. Glickauf convinced General Electric to buy one of the early Univac computers and supervised its 1952 installation. The advise set Andersen on the road to business consulting.

Mike Gagel joined Andersen in 1966, became a partner in 1979 and was forced out in 1993. A technically brilliant auditor, Gagel was not a salesman and did not fit the new Andersen mold.

Mike Gagel joined Andersen in 1966, became a partner in 1979 and was forced out in 1993. A technically brilliant auditor, Gagel was not a salesman and did not fit the new Andersen mold. (Tribune photo by David Klobucar)

Richard Measelle (far left) at the running of the bulls in Pamplona, Spain. As Andersen's managing partner in Barcelona, Measelle wrote an eight-page article on bullfighting in the June 1972 edition of The Arthur Andersen Chronicle. He described the spectacle as a "moving and exalting" art.

Richard Measelle (far left) at the running of the bulls in Pamplona, Spain. As Andersen's managing partner in Barcelona, Measelle wrote an eight-page article on bullfighting in the June 1972 edition of The Arthur Andersen Chronicle. He described the spectacle as a "moving and exalting" art.

This series was reported by Delroy Alexander, Greg Burns, Robert Manor, Flynn McRoberts and E.A. Torriero. It was written by McRoberts.

Inside the gleaming Houston headquarters of Enron Corp., it could be hard to distinguish between the energy traders and the Andersen people checking their books.

By the fall of 2000, the two business giants were so enmeshed that dozens of the Chicago accounting firm's most ambitious auditors reported to work each day at Enron.

Their paychecks came from Andersen, but their livelihoods depended on the fast-growing darling of Wall Street. Enron could be a volatile partner, at times even a bully. But Andersen was hooked on a relationship that it found simply too lucrative to abandon.

Many of Andersen and Enron's top number crunchers took annual golf vacations together, making friendly bets on each round. They went on ski outings, schussing down the slopes together. Others would sneak away from the office for Astros games at Enron Field and take turns buying margaritas at Mama Ninfa's, a local Mexican restaurant chain. They played fantasy football against each other over the office computers.

"It was like these very bright geeks at Andersen suddenly got invited to this really cool, macho frat party," said Leigh Anne Dear, a former senior audit manager at Andersen who worked in Enron tower. "They were out of control, and they didn't even know it because it was so cool to associate yourself with the top, with the guys who run a multibillion-dollar company."

In time, insiders at both disgraced firms now say, those close ties eroded the most important role Andersen was supposed to play as Enron's auditor: providing strong, independent verification of its financial reports.

As Enron collapsed into bankruptcy in December, further depressing a weakened stock market, Andersen leaders portrayed it as a client run amok. But a closer examination of their relationship reveals that, in Enron, Andersen found a monster partly of its own making.

Andersen's failures at Enron were the culmination of a decade of sliding standards and audit debacles at the firm, which had come to reward salesmanship over technical skill and to pursue higher profits even if it meant compromising a legacy of defiant independence.

The closeness between Andersen and Enron--the firm's $58 million client in fiscal 2000 alone--largely robbed the auditor of its good judgment, key employees inside both firms contend. Short-circuiting their system of checks and balances and overriding their own technical staff, Andersen's lead Enron auditors signed off on questionable deals instead of telling their client "no"--until it was too late.

The confirmation for such signoffs was often circular: Enron would tell its employees that Andersen had approved the deals, while Andersen would tell its people that Enron's top decision-makers had OKd them.

But in the hallways and offices at Andersen, some auditors who worked on Enron had a word for the iffy accounting calls: shambolic.

When outsiders learned the details of Enron's dealmaking, its highflying stock plummeted. By the time the energy trader imploded last fall after admitting it overstated earnings by hundreds of millions of dollars, Andersen had little defense, since its signature was all over the deals.

And Andersen's inability to safeguard investors' interests at Enron had consequences far beyond the two firms. The episode undermined the nation's faith in the numbers that define corporate America.

Enron Corp. declined to comment for this story, and an Andersen spokesman said the firm made its response clear during its obstruction-of-justice trial that ended in a conviction in June. Andersen contends that its auditors sought to correctly account for Enron's books but were thwarted by misinformation from the now-bankrupt energy-trading giant.

In court filings this summer, Andersen's lead partner on its Enron account, David Duncan, denied ignoring "alleged red flags" in the energy trader's accounting or that his team "abandoned its professional duty to remain independent."

But interviews with executives and staffers at both firms and a review of thousands of pages of court transcripts and internal documents illustrate just how intoxicating Enron became for Andersen, which often accommodated its prized client despite the doubts of some of Andersen's own auditors.

One executive still at Enron describes the allure: "It's like Patty Hearst, you start identifying with your kidnappers."

An inherent conflict

Andersen was present at Enron's creation. The energy trader was formed by the 1985 merger of two well-established natural gas companies, Houston Natural Gas and InterNorth. Andersen was InterNorth's auditor and, as is often the case, the dominant partner in the merger retained its existing accounting firm.

But the awkwardly close relationship that came to mark the engagement didn't take hold until the early 1990s. That's when Andersen was pushing its partners to "develop practice"--that is, convince clients to buy a whole range of services beyond traditional auditing of financial statements.

Typical of those new services was internal auditing. Unlike the external audits that accounting firms had done for decades, an internal audit would not report on the fairness of financial statements but, for instance, would tell the client how efficient its operations were.

Andersen took over internal auditing for Enron in 1994. As part of a five-year, $18 million contract, dozens of Enron staffers immediately became Andersen employees working out of Enron tower. The rapid growth of Enron meant that within two years, the fees had already surpassed $18 million, according to Dear, a former internal auditor on the job.

Alberto Gude watched it all play out on the 44th floor. As vice president of information systems for Enron Corp., Gude worked for Rick Causey, a former Andersen audit manager who had become Enron's chief accounting officer. Gude's department shared the floor with Andersen's new team of internal auditors.

"All of a sudden your independent auditor was your internal auditor, and probably right there you had a conflict," said Gude, 62, who retired from Enron two years ago.

The potential conflicts were only worsened, Gude said, by the close relationships Andersen employees had with the many alumni of the firm who had taken jobs at Enron.

"It was difficult to separate that relationship from what they should have really been doing--telling Enron, `Hey, this doesn't make any sense,"' Gude said.

Andersen employees in their 20s and 30s would give up their free time to work on Enron, betting their career would rise by serving the high-profile client.

One of those eager workers was a bright Andersen auditor named David Duncan. He grew up in Beaumont, Texas, on the middle-class west side of town. He attended Forest Park High School, where he was known as a "pencil pusher"--quiet, studious and not particularly popular. He played no sports and participated in few extracurricular activities.

After high school, Duncan earned a degree in accounting from Texas A&M University, where he joined a fraternity and distinguished himself as one of the best minds in the accounting program.

Only two years after Duncan made partner in 1995, his bosses put him in charge of the Enron account. It was a plum assignment because Enron by then had morphed from an old-economy pipeline company into a new-economy favorite credited with revolutionizing how American business bought its power.

From Enron's perspective, the 37-year-old Duncan was a good fit. Its chief accounting officer, Causey, an Andersen alumnus, was friends with Duncan. Causey had been a manager on the Enron account, part of the team of auditors working with the client, before he took a job at the energy trader.

The pair often vacationed together, leading a group of Enron and Andersen colleagues on an annual golf outing to elite courses around the country. The two were decent golfers but better fundraisers in the last several years as they co-chaired the Open Heart Open, a Houston golf tournament that benefited the American Heart Association, one of the pet charities of Enron Chairman Kenneth Lay.

Although the event featured no celebrities, it consistently sold out, according to Duncan's former executive assistant, Shannon Adlong. "Everybody wanted to pay their $2,500 to join a foursome," she said. "We had to turn people away."

The draw wasn't the margaritas and the buffet dinner. The event was popular because people in Houston were eager to network with Enron employees and maybe get a job there.

But even as its hometown was toasting Enron, the company's finances were raising eyebrows. Well before its most notorious deals were struck, the perils of Enron's use of off-balance-sheet partnerships and the coziness between auditor and client were lampooned by an Andersen partner in its Houston office.

James Hecker didn't work on the Enron account but was close friends with many people on the Enron engagement team and heard their complaints about Enron's aggressive ways. One autumn afternoon seven years ago, he sat at his computer and tapped out a parody of Enron to the tune of the Eagles' "Hotel California."

"Hotel Kenneth-Lay-A," Hecker called it, after Enron's chairman. The lyrics mocked Andersen's willingness to sign off on Enron's hundreds of partnerships called special purpose entities. Years later, investigators would allege that Enron used those partnerships to hide debt and inflate profits.

In the process, several Enron executives profited handsomely, including Michael Kopper, who last month pleaded guilty to wire fraud and money-laundering charges related to one of the partnerships.

"They livin' it up at the Hotel Cram-it-Down Ya," Hecker's song went. "When the suits arrive, bring your alibis..."

His parody continued:

`Relax,' said the client,

`We are programmed to succeed

You can audit anytime you like,

but we will never bleed.'

The song reflected the pressured atmosphere in Houston, where Enron's finance staff was on the phone nearly every day, demanding that Andersen auditors sign off on some transaction. "They would call you on a Friday night and say they needed an answer by Saturday," said Warren White, a former Andersen partner in the Houston office. "We were having midnight conferences with them."

If Andersen accountants objected, they would get on the phone with their Enron counterparts and call Andersen's Chicago headquarters, seeking the advice of senior partners. The conference calls would stretch for hours, with the Andersen staffers flipping through financial documents and policy statements, finding ways to appease Enron.

The marathon sessions would pressure Andersen auditors to view accounting issues Enron's way--if only to get home. White and his co-workers knew what Enron wanted and usually sought to give it to them.

"You would try to find ways to do it," White recalled. "We all knew they were the largest single client" in the Houston office.

When Enron didn't like the advice it got from Andersen, the company would press to get the answer it wanted.

Patricia Grutzmacher, a former senior manager at Andersen who worked on the Enron account, testified about such "push back" at Andersen's criminal trial. The more money involved, the stronger the push back, which would force her to work as late as one or two in the morning.

Sometimes, Enron would go over her head, insisting that Andersen senior partners overrule her. Routinely, her superiors at Andersen would reach the conclusion Enron wanted. "I would think to myself, `Why am I even here?' " Grutzmacher testified.

One such deal that kept Grutzmacher up late was Merlin, the code name for a 1999 transaction that involved Enron Chief Financial Officer Andrew Fastow and a partnership he controlled.

Now a crucial part of government investigations into Enron's finances, such deals allowed Enron to pass unwanted assets onto Fastow's partnerships, which dealt in everything from power plants to stock investments.

Merlin was one of hundreds of off-balance-sheet partnerships Enron used. They are by no means unusual, as executives look for innovative ways to raise cash and paint the best possible picture of their debts.

What was jarring at Enron was the sheer scale, frequency and complexity of the deals that it struck in its attempts to hide the true state of its finances.

Within two years, Merlin got into financial trouble, prompting Enron to buy back the declining assets and take the hit. Fastow and his partners lost nothing.

Enron's willingness to cover the losses of a supposedly independent party, Grutzmacher noted in her trial testimony, may have violated a cardinal rule of accounting. If a business deal of this type does not include some element of risk, it is sham.

Grutzmacher testified that she complained to an Enron executive. "I can't believe y'all want to do this," she told him. She contended that Enron should have to restate its earnings to reflect Merlin's losses.

The Enron executive would hear none of it. "It is what it is," he said, telling her that "the higher-ups" at Enron "have already decided that it's going to be done."

Critical voices silenced

Andersen was so willing to accommodate Enron's executives that it sometimes allowed them to influence who at Andersen would audit the client.

One of their least favorite people at the firm was Carl Bass. He was a member of Andersen's Professional Standards Group, its once-influential unit of accounting experts. For decades, the group's word was accepted as law at Andersen. Auditors perplexed by an accounting problem would consult with the group, which was based in the Chicago headquarters.

Bass was one of the only members of the standards group who worked outside of headquarters, a nod to his desire to live in his native Texas.

Like some other members of the standards group, Bass lacked the bedside manner that elevated the careers of partners such as Duncan.

But it wasn't just the style of Bass' advice that irritated Enron executives. In 2000, he began to complain about questionable business practices at the energy trader. In one memo to his Andersen colleagues describing one of Fastow's partnerships, he wrote "this whole deal looks like there is no substance."

Tensions grew between him and Enron until Enron insisted that Bass be excluded from its account; they considered him a roadblock to their rapid-fire dealmaking, according to testimony by several Andersen partners.

Instead of standing up to the client, Andersen senior partners went along. Early in 2001, they removed him from day-to-day troubleshooting on the account.

"I was upset," Bass testified in Andersen's criminal trial, "that we had a client that was telling the firm, basically, who they would or would not have the engagement team consult with on their transactions."

Weeks passed after Bass asked Duncan to go back and talk to Enron about him returning to the engagement. In court testimony, Duncan explained how he felt compelled to ask Enron's Causey whether Bass could remain part of Andersen's team.

"I told him I would make an appeal to Mr. Causey and see if there were some movement there," Duncan testified. But he eventually told Bass that Causey would not back down.

The idea that Enron could shove aside someone from the standards group made a tremendous impression on Andersen's Houston auditors.

"I felt like that if you didn't act a certain way sometimes or give certain answers in certain circumstances, that it could jeopardize your existence on the Enron engagement," Grutzmacher testified in the Houston trial.

The Enron account had become so lucrative for Andersen that the firm was unwilling to step away, even when it determined the engagement was one of its most risky--part of a firm-wide assessment of clients begun years earlier in the wake of litigation.

The question came up during the firm's annual review of the Enron account in February 2001, when Houston partners briefed their Chicago headquarters in a conference call. Andersen partners described Enron's accounting for trades as "intelligent gambling."

They also discussed whether outsiders would question Andersen's independence given that fees on the Enron account could soar to as much as $100 million.

But Andersen's leaders decided to retain Enron as a client and determined the size of fees was not an issue. "Such [an] amount did not trouble the participants," wrote Andersen auditor Michael Jones in an e-mail to Duncan the following day.

Andersen auditors weren't the only ones raising concerns about Enron's books. By July of last year, a growing number of Enron executives were starting to question their employer's finances as well. One of them was Margaret Ceconi, who negotiated deals for Enron Energy Services, which promised locked-in prices to big users of power and other commodities in return for long-term contracts.

Many of the people she worked with at EES didn't have the accounting background to ask tough questions about the division's deals. When they did, Ceconi said, Enron's finance people had the same answer: "We have our models, and Andersen has signed off on it."

"That's usually how they shut everyone up," she said.

Ceconi, though, had a degree in accounting and experience as a banker and became suspicious after Enron announced its second-quarter 2001 results. She knew that many EES deals were losing big money, partly because customers were balking at paying high prices that had dropped since the deals had been signed.

(In one such case, Enron recently sued Tribune Co., accusing it of reneging on a contract to purchase newsprint.)

But EES' financial woes weren't reflected in Enron's second-quarter numbers. The word around Enron was that the losses at EES had simply been shifted to Enron North America, the company's profitable energy-trading arm.

In July, Ceconi e-mailed the Securities and Exchange Commission with a question of her own. Not wanting to identify her company, she used a hypothetical example:

Say you have a food company that makes both hot dogs and ice cream. If the hot dog stand is making money, and the ice cream stand is losing money, can the company put the ice cream losses on the profitable hot dog books since they both have the same owner?

Two days later, a woman from the SEC contacted her and said the answer was clear: Such accounting would misrepresent the performance of each of the food stands.

Armed with the information, Ceconi began to try to find documentation. But before she could, Ceconi was laid off Aug. 3 along with other dealmakers at the faltering EES.

Less than two weeks later, Enron Chief Executive Jeff Skilling stepped down, citing a desire to spend more time with his family. Skilling's speedy exit--he had only taken the job earlier that year--got Wall Street analysts talking.

Until then, Enron was a star performer. The month before his departure, all but one of 16 major analysts covering the company were urging investors to buy it. The company's stock had soared 89 percent the year before, on top of a 58 percent gain in 1999.

Although the company continued to report rising profits, its stock had fallen nearly 50 percent by mid-2001, along with the market's other boom-time favorites such as high-tech stocks.

Its gambles on high-speed Internet ventures were tanking, and California politicians were blaming the company for the state's power crisis. Enron, after all, had been a top cheerleader for the power deregulation that many contended was the root of the problem.

Skilling insisted all was well, but on the day he left, skeptical investors sent its stock down 7 percent in after-hours trading, to $39.80 a share.

Within Enron, festering grievances rose to the surface, including at least two memos to Lay, who had reclaimed his CEO title after Skilling's departure.

The first memo was sent Aug. 15 by Enron executive Sherron Watkins, another Andersen alum. Warning Lay that a "wave" of scandals linked to Fastow's partnerships could bring down Enron, Watkins added, "The business world will consider the past successes as nothing but an elaborate accounting hoax."

Ceconi sent a similar message on Aug. 29, asking Lay and Enron's corporate secretary to forward it to Enron's board of directors. "I'm sure," she wrote, "the board has only scratched the surface of the impending problems that plague Enron at the moment."

By late September, Enron's financial underpinnings were coming undone. The energy trader was using its own stock to fund part of its complex web of partnerships. As the stock price soared in 1999 and 2000, its rising value helped offset any losses in the investments those partnerships held. But when the stock started falling in 2001, the partnerships fell with it.

Watkins had called her former Andersen colleague, Hecker, to sound out her misgivings about Enron's partnerships. Hecker later testified that he told his Houston colleagues of Watkins' concerns and that none appeared "upset" at the news.

He then wrote a memo to Duncan, referring to her claims as " `smoking guns' that you can't extinguish."

The questions only mounted. In a series of September conference calls between its Chicago and Houston offices, Andersen auditors were struggling with how to properly restate and account for losses that had been ignored.

John Stewart, an Andersen partner in Chicago who was perhaps the firm's most respected voice on the Professional Standards Group, asked Bass to sit in on one of the calls.

Bass listened to the update and was stunned, not only by the amount of losses that needed to be restated but by the realization that Enron had ignored his warnings months before.

He also discovered that the lines between Enron and Andersen had become so blurred that even senior Andersen management not involved in the day-to-day auditing of Enron were sucked in by it.

"Who signed off on this?" Michael Lowther, the partner in charge of Andersen's energy and oil practice in the Houston office, asked his regional boss, Mike Odom, during the conference call, according to court testimony.

"You and I did," Odom replied.

Though the Enron account was on the verge of implosion, few partners knew it as several thousand Andersen employees and their spouses gathered in New Orleans in the first week of October for the firm's first worldwide meeting in years.

CEO Joe Berardino had considered postponing the two-day event because of the Sept. 11 terrorist attacks. But he was determined to bring the partners together, mainly to show that the firm had recovered from the nasty infighting with its consultants; after years of battling, the consultants had finally split off from Andersen in 2000 to form Accenture.

Andersen spent well over a million dollars on the glitzy, high-tech affair. Inside the convention center, partners sat in comfy theater-style chairs listening on earphones to translations in several languages.

At one point, the faces of some of Andersen's star partners flashed onto giant video monitors. One was Duncan, who was too busy with the mess in Houston to attend the first day of the meeting.

As Duncan's image appeared, a few partners from Chicago seethed. To them, Duncan was a symbol of the new breed of auditor at Andersen, those who compromised sound accounting for the sake of profit.

In his keynote speech to the larger gathering, Berardino gave no hint of any trouble at Enron and focused on "integrated globalization," a vision of the firm doing cutting-edge audit, tax and financial advising from Berlin to Beijing.

After Berardino finished, the stage backdrop turned into an elongated mirror, and the audience saw its reflection. "The future is you," a voice thundered through the hall.

Back in Houston, where the future of the firm would be dashed, papers were strewn around the office.

Files were piled high on desks and cabinets, even in the hallways. Staffers walked gingerly to avoid knocking over the teetering stacks.

Tensions were escalating between Andersen and its once-prized client--this time over how they would explain its financial woes to investors. By mid-October, they were arguing over how to tell the public about the massive losses hidden in Enron's off-balance-sheet partnerships. Enron insisted that it should be reported as a one-time hit, which would diminish its impact on Wall Street, but the auditors disagreed, according to court testimony.

Late the night before Enron was scheduled to make its explanation public, Andersen auditors thought they had convinced Enron of their position for fuller disclosure. But on Oct. 16, Enron said it would take a $1.01 billion charge, producing its first quarterly loss in four years--a whopping $618 million.

The almost-absurd nature of the accounting was captured in testimony by Benjamin Neuhausen, a member of Andersen's Professional Standards Group. "It was a balance sheet error that Arthur Andersen didn't correct," Neuhausen said. "A billion-dollar debit needed to find a home. It was classified as an asset incorrectly."

Andersen auditors believed Enron had failed to divulge the true nature of its partnership losses. They worried Enron was misleading the public and that the SEC would come asking a lot of questions.

Andersen's Chicago headquarters was demanding answers as well. Amelia Ripepi, head of the standards group, excused herself from a Saturday-morning church choir practice for a dire call to Houston.

She had stern words for Duncan, telling him he could be disciplined for the shoddy accounting practices on the Enron account.

Two days later, Enron shares fell another 20 percent, to barely $20, when the company told investors that the SEC had launched an informal inquiry.

Andersen's Enron auditors faced a crisis on several fronts. Their Chicago bosses were headed their way. So were federal investigators.

All-night shredding

On the morning of Oct. 23, Duncan and others from the Enron team listened in on a call between stock analysts and Enron executives, who were trying to explain the company's financial free fall. It "did not particularly go well," Duncan later testified. "There were many pointed questions asked."

After lunch, he called the firm's entire Enron team together in the midst of the clutter in Conference Room 37C1.

In his understated drawl, the lanky Texan told them that Andersen would have to aid in an SEC investigation of the collapsing energy trader.

Then, he added, they should comply with the document retention policy. Andersen had created the policy a year and a half earlier to avoid having plaintiff lawyers use the firm's paperwork as ammunition against it in court.

No one asked Duncan what he meant, and he testified at Andersen's trial that he never thought that his order could lead to obstruction of justice.

Although his order may have sounded vague, it launched a massive effort to clean up the office's chaotic Enron files. Within hours, Andersen's auditors on the 37th floor of a building near Enron tower were culling their files.

The housecleaning would go on virtually around the clock. Within three days, in Houston and other Andersen offices with Enron-related work, more than a ton of documents would be discarded--more than is usually shredded in a year--and roughly 30,000 e-mails and computer files would be deleted.

Andersen staffers were seen huddled around file cabinets, rifling through desks and picking through piles of paperwork in the Houston office's common workspaces, their hands stinging from paper cuts.

With the document purge at full throttle, Andersen sent a special team to Houston to make sure the firm's office there fixed its own mistakes. When Andersen's fraud investigator, David Stulb, dropped by Duncan's office, Duncan pulled out the e-mail from Hecker that recounted Hecker's chat with Enron whistleblower Watkins in August.

"We need to get rid of this," Duncan said, according to Stulb's court testimony.

Stulb looked him in the eye. "Dave, you really need to keep this information," he told Duncan. "There is a strong likelihood we will need this information."

Duncan nodded.

Later, Stulb phoned his boss in New York and told him, "Dave Duncan needs some guidance on document retention."

The meaning of the document retention policy had been debated repeatedly within the firm. Its interpretation in the Enron case fell to NancyTemple, a workaholic trial lawyer who had taken a pay cut to join Andersen from a prestigious Chicago law firm just two years earlier.

More than a week before Duncan issued his vague command, Temple had sent an e-mail urging Andersen partners to comply with the policy.

John Stewart of the Professional Standards Group didn't understand. Was he supposed to delete the e-mails about Enron in his possession, even though the case was attracting outside scrutiny?

Stewart went upstairs to Temple's cubicle in the legal department at 33 W. Monroe St., where she advised him that the policy called for keeping final versions of the memos while discarding drafts.

"I was bothered about doing that," Stewart later testified, adding that he deleted the drafts only after receiving Temple's assurance that she would retain copies of the drafts for safekeeping, which she did.

Even more important were issues raised in the memos and conference calls being held about Enron. Given the problems with a Fastow partnership called LJM2, Stewart was concerned that Enron probably had an LJM1 lurking out there with similar troubles, and he asked about it in a conference call with at least a dozen Andersen people listening in.

Duncan assured everyone that the investments in LJM1 really were legitimate. Debra Cash, a Houston-based partner who worked for Duncan on the Enron account, remained quiet.

But the next day, Stewart's phone rang in Chicago. Cash, he recalled, just wanted him to know that he shouldn't interpret her silence on the conference call as agreement with Duncan's blithe assurances. That implied to Stewart that she had reservations, and he exploded.

"How was I supposed to know that?" he demanded. "You're an Andersen partner. You have to speak up."

The question of whether to shred was eventually resolved when, on Nov. 9, Temple alerted the Andersen audit team in Houston that the firm had received a federal subpoena.

As Adlong, Duncan's assistant, later testified, she stepped into Duncan's office with documents marked for shredding, and he snapped at her: "No, you are not to shred anymore. Who's asking you to shred?"

Taken aback by the flash of temper from her levelheaded boss, Adlong sent an emergency e-mail to Duncan's staff. "Per Dave: no more shredding," it read.

Then Adlong went to the office shredder, grabbed a piece of paper out of a box and scrawled a sign: "No more shredding."

Coming apart

The once-happy marriage between Enron and Andersen was nearing a final split. It came to a head in meetings and calls at the end of October between golf buddies Duncan and Causey high in the Enron tower.

According to Duncan's testimony, another Andersen partner assigned to Enron, Causey told them disturbing details about an off-the-books partnership loosely named after Chewbacca, a Star Wars character.

Andersen learned that Chewco had not been properly accounted for and was not an independent entity, as Enron had told Andersen in 1997. The upshot: Its millions in debt and losses had to be reflected on Enron's books.

Duncan and another partner on the Enron engagement, Tom Bauer, frantically tried their own form of push back, demanding answers from Enron about Chewco.

Long accustomed to getting its way, Enron sent Duncan a message: Back off. "If we continue revisiting prior conclusions, where is that process going to end?" Duncan testified Causey told him.

It was becoming increasingly clear that federal investigators would be the ones answering that question. On Oct. 31, Enron acknowledged that SEC officials were conducting a full-scale investigation. More investors fled the stock, which was racing toward zero.

A week later, under pressure from federal investigators and investors, Enron made yet another stunning announcement. It revealed that it had overstated its earnings by more than a half-billion dollars between 1997 and 2000.

Die-hard investors held out some hope. Houston rival Dynegy Inc., owner of Illinois Power, emerged as a potential savior, and the pair signed a $24 billion merger pact. But a week after Thanksgiving, Dynegy pulled out.

Enron stock, which had traded at more than $90 per share in August 2000, closed at just 61 cents. On Dec. 2, Enron filed the largest corporate bankruptcy in U.S. history.

The relationship between the energy trader and its auditor had imploded, taken down by lies and broken trust. Andersen would never finish its last audit of Enron.

In January, in announcing its plans to fire Duncan, Andersen said its one-time star partner had "directed the purposeful destruction of a very substantial volume of documents--and in doing so, he gave every appearance of destroying these materials in anticipation of a government request for documents."

Later, Duncan would come to agree with that assessment. Facing a possible lengthy jail term, he somberly told the Houston courtroom that he had done a lot of "soul-searching" before concluding that he had indeed obstructed justice.

Duncan would not go down alone, however. Prosecutors, mindful of the firm's past regulatory run-ins, uncovered details of the shredding and concluded that Andersen had to suffer the consequences of a criminal prosecution. Lesser penalties weren't getting the message across.

Remarkably, Andersen's leaders failed to fully recognize the firm's dire position as they headed into fateful meetings with federal prosecutors.

This series was reported by Delroy Alexander, Greg Burns, Robert Manor, Flynn McRoberts and E.A. Torriero. It was written by McRoberts.

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The series

Sunday: After decades as the gold standard for U.S. auditing firms, Andersen changed its focus and lost its way.

Monday: A revolution sweeps Andersen, pitting auditors against consultants in a race for higher profit.

Tuesday: Andersen struggles to deal with a monster it helped create: Enron.

Wednesday: Faulty decisions and strategy in Andersen's final months set the firm up for its collapse.